The Hon. Bill ClintonPresident of the
United States1600 Pennsylvania Ave.Washington, D.C.

Dear Mr. President:

I appreciated the tone of your interview
in The Wall Street Journal this morning, which indicates that you
have considerable flexibility of mind in your ongoing negotiations with
congressional Republicans on the budget and taxes. It does, though, prompt me
to write this, believing you have a misapprehension about the need for a
capital gains tax cut and the indexation of capgains.

This comes through especially in your
comments about Senator Bumpersís proposal to bring capital gains tax relief to
small businessmen and farmers. The only reason small businessmen and farmers
want a lower rate is because of the capital gains they already have on their
books, gains almost entirely due to past inflation. The problem they have
would best be addressed by an executive order from you, instructing Treasury
to index capital gains retroactively and prospectively.

You indicated your firm opposition to
indexing, on the grounds that it would result in revenue losses in the future.
In fact, the failure to index capgains in the 1986 Tax Reform Act has resulted
in enormous revenue losses to Treasury and helped defeat President Bush in
1992, for his failure to fulfill his 1988 promise to do so. There is more than
$7 trillion in unrealized capital gains that is purely inflationary, backed up
at the Treasury tax gate, which small businessmen and farmers are unable to
realize because the taxes they would have to pay would ruin them.

If you thought through what I am saying,
Mr. President, you would realize that the Government is not entitled to
revenues from the realization of inflated gains, which now come only when
sales are forced by desperate families. Treasury bureaucrats who argue about
revenue losses can see only the $7 trillion outside their doors, lusting for a
28% crack at it in order to balance the budget. They are not expected to take
into account these moral considerations, but I believe you agree that you
are.

Insofar as future capital gains
are concerned, the small businessmen, farmers and entrepreneurs who are the
bedrock of American capitalism have little or no direct interest in a lower
tax rate on gains. They do not make decisions on entering the fray based on
tax rates on capital. It is the capitalist who finances these enterprises who
must carefully reckon the after-tax returns on capital put at risk before
making decisions that will make capital accessible to new
business.

You can take some credit for the flow of
fresh capital from the top to the bottom of the economic pyramid in your
presidency, owing to your support of Fed Chairman Alan Greenspan. By his
keeping the dollar sound relative to gold in his ten years as chairman, he has
sharply reduced the monetary risk to capital formation.

Unfortunately, the new capital formed as
a result benefits most the established enterprises that rely on debt finance.
The Fedís sound policies have helped grass-roots capital formation much less.
This requires a rate cut from 28% to lower levels, as Chairmen Archer and Roth
propose. The lower the rate, the more Americans who are starved for capital
and credit will benefit. It is this reasoning which has led Greenspan to argue
for elimination of the capgains tax altogether. For all the good you have done
by supporting Greenspan on monetary policy, Mr. President, it is almost as
difficult today for people at the bottom of the economy to get capital as it
was in 1992.

If you were a man who we could see was
set in his ways, his feet in concrete, I would not take the trouble to write
this letter. But I have seen that you have kept an open mind on almost all
matters of public policy in your presidency, which suggests you might be
amenable to reconsideration of these issues as the debate goes
forward.

My best wishes to you and the First Lady,
and good luck to you on all fronts.